LONDON: The euro steadied after earlier falls on Thursday as political chaos in Greece called into doubt a planned referendum that could trigger a disorderly default and an exit from the euro zone, amid open dissent within the Greek government.
Greek Prime Minister George Papandreou spooked markets this week by calling for a referendum on a new rescue package but Finance Minister Evangelos Venizelos said on Thursday he opposed holding the vote.
Another Greek ruling party lawmaker said she would not support the government, which has a wafer-thin parliamentary majority.
The euro was steady at 1.3753, off a low of $1.3656 just ahead of reported sovereign bids around $1.3650, with traders citing demand from a US bank.
However, they said it remained vulnerable to further losses which would leave it targeting $1.3608, a three-week low.
France and Germany made it clear at a meeting of G20 leaders that Greece must decide urgently if it wants to remain in the euro zone, leaving investors inclined to sell euros on rallies.
"Depending on whether there is a referendum or not, I would not be surprised to see the euro trade down to $1.33/$1.34 area in the next two to three weeks," said Jeremy Stretch, currency strategist at CIBC.
"Merkel, Sarkozy and Papandreou are playing something akin to a game of poker, where they keep raising the stakes."
Traders said the confusion around how the euro zone's debt crisis would pan out was also tempering the euro's losses, with some speculating that an exit of the currency bloc's most indebted country could be a reason to buy the euro.
Others, however, were concerned about the potentially severe implications for the banking sector if Greece defaulted and quit the euro and the difficulty of preventing the crisis spreading, with yields on Italian bonds rising towards unsustainable levels.
Below $1.36, support for the euro lies at $1.3566, the 61.8 percent retracement of its October rally.
The euro retreated as attention shifted back to Greece after the US Federal Reserve offered no new stimulus on Wednesday, saying it was mulling the possibility of buying more mortgage debt to spur a struggling recovery.
"We're negative on the euro. There are very few scenarios in my mind where the euro can rally significantly," said Adarsh Sinha, Asia-Pacific G10 FX strategist at Bank of America Merrill Lynch in Hong Kong.
Bank of America Merrill Lynch expects the euro to move towards $1.30 by year-end, but Sinha said the euro could drop further if there is an extreme outcome, such as a disorderly Greek default.
However, given the United States has debt problems of its own and with the Japanese authorities intervening to curb yen strength, traders said the euro may gain by default as investors continue to weigh who should be the biggest loser out of the three most traded currencies -- the dollar, euro and yen.
The market's focus will switch later to a European Central Bank policy meeting, the first under new head Mario Draghi.
He is expected to play safe and seek to project calm rather than panic by holding off on cutting interest rates for the time being, though markets see a small risk of a surprise cut which would send the euro lower.
Markets will be watching for any clues on whether he stands ready to carry on, or even scale up, the ECB's bond-buying programme.
The dollar was stuck in a narrow range against the yen, holding steady at 78.01 yen . The focus is on whether Japan will intervene if the yen starts heading higher again after Tokyo's massive yen-selling on Monday, estimated at a record 7.7 trillion yen.
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